FORM 10-Q

10-Q 1 d10q.htm FORM 10-Q FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-6462

TERADYNE, INC.

(Exact name of registrant as specified in its charter)


Massachusetts		04-2272148
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

321 Harrison Avenue, Boston, Massachusetts		02118
(Address of Principal Executive Offices)		(Zip Code)

617-482-2700

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

The number of shares outstanding of the registrant’s only class of Common Stock as of July 29, 2005 was 196,751,907 shares.

TERADYNE, INC.

INDEX


		Page No.

	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of July 3, 2005 and December 31, 2004	3

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 3, 2005 and July 4, 2004	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 3, 2005 and July 4, 2004	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4.	Controls and Procedures	42

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 4.	Submission of Matters to a Vote of Security Holders	44

Item 6.	Exhibits	44

PART I

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	July 3, 2005			December 31, 2004
	(in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	199,060		$	209,147
Marketable securities		73,224			75,431
Accounts receivable, net of allowance for doubtful accounts of $5,562 and $5,737 on July 3, 2005 and December 31, 2004, respectively		235,275			223,491
Inventories:
Parts		125,842			140,094
Assemblies in process		131,777			122,902

Net inventories		257,619			262,996
Prepayments and other current assets		34,116			34,761

Total current assets		799,294			805,826
Property, plant, and equipment, at cost		1,326,619			1,349,497
Less: accumulated depreciation		(798,505	)		(802,422	)

Net property, plant, and equipment		528,114			547,075
Marketable securities		277,151			406,615
Goodwill		116,176			116,176
Other assets		44,179			46,870

Total assets	$	1,764,914		$	1,922,562


LIABILITIES
Current liabilities:
Notes payable—banks	$	2,705		$	4,826
Current portion of long-term debt		300			321
Accounts payable		70,347			62,006
Accrued employees’ compensation and withholdings		54,724			106,298
Deferred revenue and customer advances		34,204			30,399
Other accrued liabilities		57,761			60,970
Income taxes payable		3,242			11,738

Total current liabilities		223,283			276,558
Pension liability		54,257			69,187
Long-term other accrued liabilities		45,057			44,321
Convertible senior notes		371,500			391,500
Other long-term debt		7,123			7,432

Total liabilities		701,220			788,998

Commitments and contingencies (Note M)

SHAREHOLDERS’ EQUITY
Common stock, $0.125 par value, 1,000,000 shares authorized, 196,612 and 194,253 shares issued and outstanding at July 3, 2005 and December 31, 2004, respectively		24,577			24,282
Additional paid-in capital		798,550			768,875
Accumulated other comprehensive loss		(63,117	)		(61,313	)
Retained earnings		303,684			401,720

Total shareholders’ equity		1,063,694			1,133,564

Total liabilities and shareholders’ equity	$	1,764,914		$	1,922,562

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2004 are an integral part of the condensed consolidated financial statements.

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Three Months Ended						For the Six Months Ended
	July 3, 2005			July 4, 2004			July 3, 2005			July 4, 2004
	(in thousands, except per share amounts)
Net revenues:
Products	$	269,665		$	466,802		$	525,728		$	840,769
Services		50,507			59,661			100,025			116,297

Net revenues		320,172			526,463			625,753			957,066
Cost of revenues:
Cost of products		180,801			259,500			354,702			474,902
Cost of services		41,206			40,335			83,746			79,561

Gross profit		98,165			226,628			187,305			402,603
Operating expenses:
Engineering and development		60,915			66,914			125,155			131,608
Selling and administrative		67,542			69,991			132,857			136,233
Restructuring and other charges, net		10,807			152			21,435			282
Gain on sale of business		(612	)		(865	)		(612	)		(865	)

Operating expenses		138,652			136,192			278,835			267,258

(Loss) income from operations		(40,487	)		90,436			(91,530	)		135,345
Interest income		3,841			3,470			8,246			7,061
Interest expense		(4,153	)		(4,895	)		(8,587	)		(9,527	)
Other income and expense, net		—			426			—			1,277

(Loss) income before income taxes		(40,799	)		89,437			(91,871	)		134,156
Income tax expense		4,665			8,944			6,165			13,416

Net (loss) income	$	(45,464	)	$	80,493		$	(98,036	)	$	120,740

Net (loss) income per common share—basic	$	(0.23	)	$	0.41		$	(0.50	)	$	0.62

Shares used in calculations of net (loss) income per common share—basic		195,757			194,015			195,688			193,934

Net (loss) income per common share—diluted	$	(0.23	)	$	0.39		$	(0.50	)	$	0.60

Shares used in calculations of net (loss) income per common share—diluted		195,757			213,486			195,688			214,383

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Six Months Ended
	July 3, 2005			July 4, 2004
	(in thousands)
Cash flows from operating activities:
Net (loss) income	$	(98,036	)	$	120,740
Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities:
Depreciation		57,039			61,687
Amortization		2,894			2,922
Impairment of long-lived assets		9,752			277
Gain on sale of land and building		(4,445	)		—
Gain on sale of product lines and business		(1,521	)		(865	)
Provision for inventory		4,843			6,563
Provision for doubtful accounts		—			94
Other non-cash items, net		667			377
Changes in operating assets and liabilities, net of product lines sold:
Accounts receivable		(11,752	)		(66,015	)
Inventories		33,001			(53,780	)
Other assets		(8,133	)		3,648
Accounts payable, deferred revenue and accrued expenses		(56,833	)		37,517
Accrued income taxes		(8,496	)		5,803

Net cash (used for) provided by operating activities		(81,020	)		118,968

Cash flows from investing activities:
Investments in property, plant and equipment		(80,304	)		(78,466	)
Proceeds from sale of product lines and business		1,521			865
Proceeds from sale of land and building		13,020			—
Purchases of available-for-sale marketable securities		(117,253	)		(135,907	)
Proceeds from sale and maturities of available-for-sale marketable securities		246,041			62,301

Net cash provided by (used for) investing activities		63,025			(151,207	)

Cash flows from financing activities:
Payments of long term debt and notes payable		(22,062	)		(229	)
Issuance of common stock under employee stock option and stock purchase plans		29,970			28,359

Net cash provided by financing activities		7,908			28,130

Decrease in cash and cash equivalents		(10,087	)		(4,109	)
Cash and cash equivalents at beginning of period		209,147			228,444

Cash and cash equivalents at end of period	$	199,060		$	224,335

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. The Company

Teradyne, Inc. is a leading supplier of automatic test equipment and a leading provider of high performance interconnection systems.

Teradyne’s automatic test equipment products include systems that:

•

test semiconductors (“Semiconductor Test Systems”);

•

test and inspect circuit-boards (“Assembly Test Systems”);

•

diagnose, program and test automotive electronics systems (“Diagnostic Solutions”); and

•

test voice and broadband access networks (“Broadband Test Systems”).

Teradyne’s interconnection systems products and services (“Connection Systems”) include:

•

high bandwidth backplane assemblies; and

•

high density connectors.

Broadband Test Systems and Diagnostic Solutions have been combined into “Other Test Systems” for purposes of Teradyne’s segment reporting.

Statements in this Quarterly Report on Form 10-Q which are not historical facts, so called “forward looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in Teradyne’s filings with the Securities and Exchange Commission. See also “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors That May Affect Future Results.”

B. Accounting Policies

Basis of Presentation

The condensed consolidated interim financial statements include the accounts of Teradyne and its subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of such interim financial statements. Certain prior years’ amounts were reclassified to conform to the current year presentation. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.

The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission on March 16, 2005 for the year ended December 31, 2004.

Preparation of Financial Statements

The preparation of consolidated financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements. Actual results may differ significantly from these estimates.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Product Warranty

Teradyne generally provides a one-year warranty on its products commencing upon installation or shipment. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience. Related costs are charged to the warranty accrual as incurred. The balance below is included in other accrued liabilities (in thousands).


	For the Six Months Ended
	July 3, 2005			July 4, 2004
Balance at beginning of period	$	13,075		$	11,436
Accruals for warranties issued during the period		4,822			12,083
Accruals related to pre-existing warranties (including changes in estimates)		(2,118	)		(657	)
Settlements made during the period		(7,647	)		(7,510	)

Balance at end of period	$	8,132		$	15,352

When Teradyne receives revenue for extended warranties beyond one year, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The balance below is included in other accrued liabilities (in thousands).


	For the Six Months Ended
	July 3, 2005			July 4, 2004
Balance at beginning of period	$	4,090		$	1,650
Deferral of new extended warranty revenue		1,248			1,872
Recognition of extended warranty deferred revenue		(838	)		(558	)

Balance at end of period	$	4,500		$	2,964

Employee Stock Option Plans and Employee Stock Purchase Plan

Teradyne accounts for its stock option plans and stock purchase plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations. Teradyne’s employee stock purchase plan is a non-compensatory plan. Teradyne’s stock option plans are accounted for using the intrinsic value method under the provisions of APB 25. Accordingly, there has been no expense for option issuances under the employee or director stock option plans or employee stock purchase plans. Proceeds from the exercise of stock options and the issuance of the employee stock purchase plan under Teradyne’s stock plans are credited to common stock at par value and the excess is credited to additional paid-in capital.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Teradyne makes pro forma footnote disclosures as though the fair value method was followed under Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting For Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”). Had compensation for Teradyne’s stock based compensation plans been accounted for at fair value, the amounts reported in the Statement of Operations for the three and six months ended July 3, 2005 and July 4, 2004 would have been the following (in millions, except per share amounts):


	For the Three Months Ended						For the Six Months Ended
	July 3, 2005			July 4, 2004			July 3, 2005			July 4, 2004
Net (loss) income as reported	$	(45.5	)	$	80.5		$	(98.0	)	$	120.7
Deduct: Total stock-based employee compensation expense determined under fair value method		(77.6	)		(17.9	)		(93.5	)		(51.3	)
Pro forma net (loss) income		(123.1	)		62.6			(191.5	)		69.4
Net (loss) income per common share—basic as reported		(0.23	)		0.41			(0.50	)		0.62
Net (loss) income per common share—diluted as reported		(0.23	)		0.39			(0.50	)		0.60
Net (loss) income per common share—basic pro forma		(0.63	)		0.32			(0.98	)		0.36
Net (loss) income per common share—diluted pro forma		(0.63	)		0.31			(0.98	)		0.36

The weighted average grant date fair value for options granted during the three months ended July 3, 2005 and July 4, 2004 was $5.72 and $11.98 per option, respectively, and for the six months ended July 3, 2005 and July 4, 2004 was $6.27 and $14.60 per option, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:


	For the Three Months Ended				For the Six Months Ended
	July 3, 2005		July 4, 2004		July 3, 2005		July 4, 2004
Expected life (years)	4.5		4.5		4.5		4.5
Interest rate	3.8	%	3.6	%	3.8	%	3.0	%
Volatility	54.1	%	64.7	%	54.1	%	65.7	%
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%

The weighted-average fair value of employee stock purchase rights granted during the three and six months ended July 3, 2005 and July 4, 2004 was $3.08 and $6.93 per right, respectively. The fair value of the employees’ purchase rights was estimated using the Black-Scholes option-pricing model with the following assumptions:


	For the Three Months Ended				For the Six Months Ended
	July 3, 2005		July 4, 2004		July 3, 2005		July 4, 2004
Expected life (years)	0.5		1.0		0.5		1.0
Interest rate	3.4	%	1.3	%	3.4	%	1.3	%
Volatility	35.5	%	44.9	%	35.5	%	44.9	%
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On May 26, 2005, the Board of Directors approved the accelerated vesting of certain outstanding, unvested “out of the money” stock options awarded to employees, officers and other eligible participants under Teradyne’s various stock option plans. The stock options that were accelerated had exercise prices that were in excess of $13.26, the closing price of Teradyne’s common stock on the New York Stock Exchange on May 26, 2005 and ranged in exercise price from $13.73 to $41.37 per share. Options to purchase approximately 7.6 million shares became exercisable immediately as a result of the vesting acceleration. No compensation expense was recorded in Teradyne’s Condensed Consolidated Statements of Operations for the three and six months ended July 3, 2005 related to this action as these options had no intrinsic value on May 26, 2005.

Teradyne will be required to implement the expense recognition provisions of the Financial Accounting Standards Board’s new standard, SFAS No. 123R, “Share Based Payment” (“SFAS 123R”), starting with the first quarter of its fiscal year 2006 that begins on January 1, 2006. As a result of the acceleration, Teradyne will reduce compensation expense it otherwise would be required to record by approximately $48.6 million on a pre-tax basis over fiscal years 2006, 2007 and 2008.

Other Comprehensive (Loss) Income

Comprehensive (loss) income includes net (loss) income, minimum pension liability adjustments, unrealized gains and losses on foreign exchange contracts, unrealized gains and losses on certain investments in debt and equity securities and cumulative translation adjustments. The components of comprehensive (loss) income are as follows (in thousands):


	For the Three Months Ended
	July 3, 2005			July 4, 2004
Net (loss) income	$	(45,464	)	$	80,493
Foreign currency translation adjustments		(321	)		(289	)
Change in unrealized gain (loss) on foreign exchange contracts		79			(289	)
Unrealized gain (loss) on marketable securities		1,800			(9,145	)
Additional minimum pension liability		1,925			—

Comprehensive (loss) income	$	(41,981	)	$	70,770


	For the Six Months Ended
	July 3, 2005			July 4, 2004
Net (loss) income	$	(98,036	)	$	120,740
Foreign currency translation adjustments		(515	)		294
Change in unrealized gain (loss) on foreign exchange contracts		378			(289	)
Unrealized loss on marketable securities		(2,870	)		(6,363	)
Additional minimum pension liability		1,204			—
Reclassification adjustment for gain on marketable securities included in net (loss) income		—			(963	)

Comprehensive (loss) income	$	(99,839	)	$	113,419

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

C. Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R (revised 2004). In annual periods beginning after June 15, 2005, SFAS 123R would eliminate the ability to account for equity-based compensation using the intrinsic value-based method under APB 25. SFAS 123R requires companies to record in their Statements of Operations equity-based compensation expense for stock compensation awards based on the fair value of the equity instrument at the time of grant. Teradyne expects to adopt SFAS 123R beginning in the first quarter of 2006, as required, using the Modified Prospective method, and will not restate prior periods for the adoption of SFAS 123R.

Currently, Teradyne discloses pro forma net (loss) income and related pro forma net (loss) income per share in accordance with SFAS 123 and SFAS 148. Under SFAS 123R, equity-based compensation expense is required to be recognized in companies’ financial statements. Teradyne is considering the use of other equity compensation vehicles including the use of restricted stock.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 modifies the accounting for abnormal inventory costs, and the manner in which companies allocate fixed overhead expenses to inventory. SFAS 151 is effective for inventory costs incurred during annual periods beginning after June 15, 2005. Teradyne does not expect SFAS 151 to have a material impact on its financial position and results of operations.

D. Goodwill and Intangible Assets

Amortizable intangible assets consist of the following and are included in other assets on the balance sheet (in thousands):


	July 3, 2005
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Useful Life
Completed technology	$	19,193	$	9,428	$	9,765	7.5 years
Service and software maintenance contracts and customer relationships		8,342		5,741		2,601	5.7 years
Tradenames and trademarks		3,800		1,742		2,058	8.0 years

Total intangible assets	$	31,335	$	16,911	$	14,424	7.1 years


	December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Useful Life
Completed technology	$	19,193	$	8,145	$	11,048	7.5 years
Service and software maintenance contracts and customer relationships		8,342		5,440		2,902	5.7 years
Tradenames and trademarks		3,800		1,504		2,296	8.0 years

Total intangible assets	$	31,335	$	15,089	$	16,246	7.1 years

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Aggregate amortization expense for both the three months ended July 3, 2005 and July 4, 2004 was $0.9 million. Aggregate amortization expense for both the six months ended July 3, 2005 and July 4, 2004 was $1.8 million. Estimated amortization expense for each of the five succeeding fiscal years is as follows (in thousands):


Year	Amount
2005 (remainder)	$	1,821
2006		3,643
2007		3,529
2008		2,962
2009		2,469

E. Net (Loss) Income per Common Share

The following table sets forth the computation of basic and diluted net (loss) income per common share (in thousands, except per share amounts):


	For the Three Months Ended					For the Six Months Ended
	July 3, 2005			July 4, 2004		July 3, 2005			July 4, 2004
Net (loss) income	$	(45,464	)	$	80,493	$	(98,036	)	$	120,740
Income impact of assumed conversion of convertible senior notes		—			3,668		—			7,337

Net (loss) income—diluted	$	(45,464	)	$	84,161	$	(98,036	)	$	128,077

Shares used in (loss) income per common share—basic		195,757			194,015		195,688			193,934
Effect of dilutive securities:
Incremental shares from assumed conversion of notes payable		—			15,385		—			15,385
Employee and director stock options		—			4,005		—			5,014
Employee stock purchase rights		—			81		—			50

Dilutive potential common shares		—			19,471		—			20,449

Shares used in (loss) income per common share—diluted		195,757			213,486		195,688			214,383

Net (loss) income per common share—basic	$	(0.23	)	$	0.41	$	(0.50	)	$	0.62

Net (loss) income per common share—diluted	$	(0.23	)	$	0.39	$	(0.50	)	$	0.60

The computation of diluted net loss per common share for the three and six months ended July 3, 2005 excludes the effect of the potential exercise of options to purchase approximately 29.6 million shares because the effect would have been anti-dilutive. Diluted loss per common share for the three and six months ended July 3, 2005 also excludes 14.3 million shares related to Teradyne’s convertible notes outstanding because the effect would have been anti-dilutive. The computation of diluted net income per common share for the three and six months ended July 4, 2004 excludes the effect of the potential exercise of options to purchase approximately 17.0 million and 16.0 million shares, respectively, because the option price was greater than the average market price of the common shares and the effect would have been anti-dilutive. The effect of Teradyne’s outstanding convertible notes on diluted net income per share for the three and six months ended July 4, 2004 was calculated using the “if converted” method as required by SFAS No. 128, “Earnings per Share”. In using the “if converted” method, $3.7 million and $7.3 million of interest expense related to the convertible notes for the three and six

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

months ended July 4, 2004, net of tax and profit sharing expenses, was added back to net income to arrive at diluted net income.

F. Restructuring and Other Charges, Net

The tables below represent activity related to restructuring charges in the three and six months ended July 3, 2005 and July 4, 2004. The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid out over the lease terms, the latest of which expires in 2012. Teradyne expects to pay out approximately $4.9 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $13.5 million as of July 3, 2005. Teradyne has subleased approximately 74% of its unoccupied space as of July 3, 2005 and is actively working to sublease the remaining space.

The table below summarizes the liability and activity for the three months ended July 3, 2005 relating to restructuring and other charges, net (in thousands):


	Long-Lived Asset Impairment			Severance and Benefits			Gain on Sale of Land and Building			Facility Related			Other Charges		Total
Balance at April 3, 2005	$	—		$	5,962		$	—		$	23,217		$	1,857	$	31,036
Second quarter 2005 provision		9,157			4,622			(4,445	)		896			577		10,807
Cash payments		—			(4,156	)		4,445			(3,082	)		856		(1,937	)
Asset write-downs		(9,157	)		—			—			—			—		(9,157	)

Balance at July 3, 2005	$	—		$	6,428		$	—		$	21,031		$	3,290	$	30,749

During the three months ended July 3, 2005, Teradyne recorded the following activities related to restructuring and other charges, net:

•

$9.2 million charge, primarily for certain long-lived assets held for sale that were impaired as the estimated fair value was less than the carrying value of the assets, including $1.3 million in the Connection Systems segment and $7.6 million at Corporate.

•

$4.6 million related to severance and related benefits for 160 people terminated in the Semiconductor Test Systems, Connection Systems and Other Test Systems segments in all functional areas.

•

$4.4 million of gains on the sale of a Corporate building in North Reading, MA and land held by Semiconductor Test Systems in Japan.

•

$0.9 million consisting of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term in the Assembly Test Systems segment.

•

$0.6 million of other charges consisting of a $0.5 million reversal of a charge taken in the prior quarter for contractual penalties associated with resizing the Connection Systems segment and $0.5 million of earn out payments received in the Assembly Test Systems and Other Test Systems segments, offset by a $1.5 million charge for transactional-related costs at Corporate.

The carrying values of the held for sale properties in the Connection Systems segment and Corporate as of July 3, 2005 were $2.8 million and $3.8 million, respectively, and are included in Property, Plant and Equipment.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The table below summarizes the liability and activity for the six months ended July 3, 2005 relating to restructuring and other charges, net (in thousands):


	Severance and Benefits			Long-Lived Asset Impairment			Gain on Sale of Land and Building			Facility Related			Other Charges		Total
Balance at December 31, 2004	$	3,060		$	—		$	—		$	21,228		$	1,029	$	25,317
First six months 2005 provision		11,705			9,752			(4,445	)		3,432			991		21,435
Cash payments		(8,337	)		—			4,445			(3,629	)		1,270		(6,251	)
Asset write-downs		—			(9,752	)		—			—			—		(9,752	)

Balance at July 3, 2005	$	6,428		$	—		$	—		$	21,031		$	3,290	$	30,749

During the six months ended July 3, 2005, Teradyne recorded the following activities related to restructuring and other charges, net:

•

$11.7 million related to severance and related benefits for 499 people terminated in the Semiconductor Test Systems, Connection Systems, Assembly Test Systems and Other Test Systems segments in all functional areas.

•

$9.8 million charge, primarily for certain long-lived assets held for sale that were impaired as the estimated fair value was less than the carrying value of the assets, including $1.3 million in the Connection Systems segment and $7.6 million at Corporate.

•

$4.4 million in gains on the sale of a Corporate building in North Reading, MA and land held by Semiconductor Test Systems in Japan.

•

$3.4 million of facility related charges consisting of: $2.3 million related to the exit of an Assembly Test Systems facility in Poway, CA; $0.9 million consisting of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term in the Assembly Test Systems segment; and $0.2 million related to the exit of a Connection Systems facility in Plano, TX.

•

$1.0 million of other charges consisting of a $0.3 million charge for contractual penalties associated with resizing the Connection Systems segment and a $1.5 million charge for transactional-related costs at Corporate offset by $0.8 million of earn out payments received in the Assembly Test Systems and Other Test Systems segments.

The table below summarizes the liability and activity for the three months ended July 4, 2004 relating to restructuring and other charges, net (in thousands):


	Long-Lived Asset Impairment			Severance and Benefits			Facility Related			Other Charges			Total
Balance at April 4, 2004	$	—		$	4,590		$	28,079		$	1,273		$	33,942
Second quarter 2004 (reversal) provision		(100	)		(458	)		1,201			(491	)		152
Cash payments		—			(1,868	)		(5,880	)		375			(7,373	)
Asset write-downs		100			—			—			—			100

Balance at July 4, 2004	$	—		$	2,264		$	23,400		$	1,157		$	26,821

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The table below summarizes the liability and activity for the six months ended July 4, 2004 relating to restructuring and other charges, net (in thousands):


	Long-Lived Asset Impairment			Severance and Benefits			Facility Related			Other Charges			Total
Balance at December 31, 2003	$	—		$	7,766		$	29,222		$	1,273		$	38,261
First six months 2004 (reversal) provision		(603	)		(760	)		2,136			(491	)		282
Cash payments		—			(4,742	)		(7,958	)		375			(12,325	)
Asset write-downs		603			—			—			—			603

Balance at July 4, 2004	$	—		$	2,264		$	23,400		$	1,157		$	26,821

In the second quarter of 2004, Teradyne recorded a charge of $1.2 million consisting primarily of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term. The Semiconductor Test Systems segment recorded $0.2 million of this charge, and $1.0 million was recorded in the Assembly Test Systems segment. During the six months ended July 4, 2004 Teradyne recorded a charge of $2.1 million, consisting of $1.2 million of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term, and $0.9 million in the Connection Systems segment for a settlement of the remaining lease obligation on a facility.

During the three and six months ended July 4, 2004, Teradyne revised its estimates on future benefits for severed employees, decreasing the current provision by approximately $0.8 million and $1.9 million, respectively. This revision is offset by charges taken for severance and related benefits of $0.3 million and $1.1 million for the three and six months ended July 4, 2004, respectively. There were 13 and 23 employees terminated in the first and second quarters of 2004, respectively, across Teradyne.

G. Gain on Sale of Business

During the three and six months ended July 3, 2005 and July 4, 2004, Teradyne recorded, as a gain on the sale of a business, proceeds of $0.6 million and $0.9 million, respectively, from the previous sale of certain assets and product lines. These amounts relate to an earn out provision from a divestiture in the Connection Systems segment in 1999.

H. Debt

During the three and six months ended July 3, 2005, Teradyne repurchased $20 million of the $391.5 million principal amount of 3.75% Convertible Senior Notes due 2006. Teradyne recorded no gain or loss related to this transaction for the three or six months ended July 3, 2005.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

I. Other Income and Expense, Net

Other income and expense, net, for the three and six months ended July 3, 2005 and July 4, 2004 includes the following (in thousands):


	For the Three Months Ended					For the Six Months Ended
	July 3, 2005		July 4, 2004			July 3, 2005		July 4, 2004
Gain on sale of an investment	$	—	$	—		$	—	$	1,058
Repayment of loan (1)		—		585			—		585
Fair value adjustment on warrants		—		(159	)		—		(366	)

Total	$	—	$	426		$	—	$	1,277

(1)	The loan had previously been valued at zero due to its uncertainty of collection.

J. Retirement Plans

Teradyne has defined benefit pension plans covering a majority of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act and the Internal Revenue Code.

Components of net periodic pension cost for all plans for the three and six months ended July 3, 2005 and July 4, 2004, respectively, are as follows (in thousands):


	For the Three Months Ended						For the Six Months Ended
	July 3, 2005			July 4, 2004			July 3, 2005			July 4, 2004
Net Periodic Benefit Cost:
Service cost	$	1,853		$	1,592		$	3,609		$	3,196
Interest cost		3,741			3,526			7,384			7,062
Expected return on plan assets		(3,528	)		(3,197	)		(7,248	)		(6,397	)
Amortization of unrecognized:
Net transition obligation		21			22			41			44
Prior service cost		335			215			554			430
Net loss		1,278			855			2,389			1,712

Total expense	$	3,700		$	3,013		$	6,729		$	6,047

Contributions

Teradyne expects to contribute up to $30 million to the U.S. Qualified Pension Plan in fiscal 2005, of which $20 million was contributed in the six months ended July 3, 2005.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Postretirement benefit plans

In addition to receiving pension benefits, Teradyne’s U.S. employees who meet specific retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death benefits, medical and dental up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees.

Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.

Components of net periodic postretirement cost are as follows (in thousands):


	For the Three Months Ended						For the Six Months Ended
	July 3, 2005			July 4, 2004			July 3, 2005			July 4, 2004
Net Periodic Benefit Cost:
Service cost	$	60		$	342		$	268		$	684
Interest cost		378			491			849			982
Expected return on plan assets		—			—			—			—
Amortization of unrecognized:
Net assets		—			72			—			144
Prior service cost		(76	)		(18	)		(152	)		(36	)
Net loss		258			117			453			234

Total expense	$	620		$	1,004		$	1,418		$	2,008

K. Income Taxes

On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Jobs Act”). The Jobs Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations.

As of July 3, 2005, there are approximately $115 million of unremitted foreign earnings considered available for repatriation. At this time, Teradyne is exploring various tax planning opportunities to repatriate unremitted foreign earnings, and does not anticipate repatriating under the Jobs Act. If Teradyne were to repatriate these available earnings under the Jobs Act, the tax expense would be approximately $2.3 million.

L. Segment Information

Teradyne has four principal reportable segments and five operating segments with Diagnostic Solutions and Broadband Test Systems combined as Other Test Systems. The four reportable segments are the design, manufacturing and marketing of Semiconductor Test Systems, Connection Systems, Assembly Test Systems and Other Test Systems. These reportable segments were determined based upon the nature of the products and services offered.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The accounting policies of the business segments are the same as those described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2004. Intersegment sales are accounted for at fair value as if sales were made to third parties. Segment information for the three and six months ended July 3, 2005 and July 4, 2004 is as follows (in thousands):


	Semiconductor Test Systems Segment			Connection Systems Segment		Assembly Test Systems Segment			Other Test Systems Segment		Corporate and Eliminations			Consolidated
*Three months ended July 3, 2005:*
Net revenue to unaffiliated customers	$	163,612		$	94,021	$	37,956		$	24,583	$	—		$	320,172
Intersegment sales		—			2,757		—			—		(2,757	)		—

Net sales		163,612			96,778		37,956			24,583		(2,757	)		320,172
(Loss) income before taxes (1)(2)	$	(35,929	)	$	2,785	$	2,961		$	1,340	$	(11,956	)	$	(40,799	)

*Three months ended July 4, 2004:*
Net revenue to unaffiliated customers	$	361,685		$	99,139	$	39,113		$	26,526	$	—		$	526,463
Intersegment sales		—			9,081		—			—		(9,081	)		—

Net sales		361,685			108,220		39,113			26,526		(9,081	)		526,463
Income (loss) before taxes (1)(2)	$	95,393		$	12,146	$	(197	)	$	1,701	$	(19,606	)	$	89,437

*Six months ended July 3, 2005:*
Net revenue to unaffiliated customers	$	311,480		$	189,245	$	75,860		$	49,168	$	—		$	625,753
Intersegment sales		—			6,146		—			—		(6,146	)		—

Net sales		311,480			195,391		75,860			49,168		(6,146	)		625,753
(Loss) income before taxes (1)(2)	$	(81,704	)	$	3,212	$	(26	)	$	2,540	$	(15,893	)	$	(91,871	)

*Six months ended July 4, 2004:*
Net revenue to unaffiliated customers	$	635,801		$	194,400	$	72,489		$	54,376	$	—		$	957,066
Intersegment sales		—			16,983		—			—		(16,983	)		—

Net sales		635,801			211,383		72,489			54,376		(16,983	)		957,066
Income (loss) before taxes (1)(2)	$	144,351		$	21,653	$	(2,402	)	$	4,544	$	(33,990	)	$	134,156

(1)	(Loss) income before taxes of the principal businesses excludes the effects of employee profit sharing, management incentive compensation, other unallocated expenses, and net interest and other income which are included in Corporate and Eliminations.

(2)	Included in the (loss) income before taxes for the following segments are charges for the first three and six months of 2005 and 2004 that include restructuring and other charges, accelerated depreciation, impairment of investments, inventory provisions and inventory write downs:

Included in the Semiconductor Test Systems segment are charges for the following (in thousands):


	For the Three Months Ended					For the Six Months Ended
	July 3, 2005		July 4, 2004			July 3, 2005		July 4, 2004
Cost of revenues—inventory	$	1,525	$	1,600		$	2,787	$	2,841
Selling and administrative—accelerated depreciation		—		—			—		66
Restructuring and other charges (reversals)		381		(542	)		1,668		(849	)

Total	$	1,906	$	1,058		$	4,455	$	2,058

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Included in the Connection Systems segment are charges for the following (in thousands):


	For the Three Months Ended						For the Six Months Ended
	July 3, 2005			July 4, 2004			July 3, 2005			July 4, 2004
Cost of revenues—inventory	$	—		$	319		$	612		$	1,234
Gain on sale of business		(612	)		(865	)		(612	)		(865	)
Restructuring and other charges		2,924			—			7,194			616

Total	$	2,312		$	(546	)	$	7,194		$	985

Included in the Assembly Test Systems segment are charges for the following (in thousands):


	For the Three Months Ended				For the Six Months Ended
	July 3, 2005		July 4, 2004		July 3, 2005		July 4, 2004
Cost of revenues—inventory	$	340	$	310	$	1,003	$	2,144
Restructuring and other charges (reversals)		276		418		5,401		(542	)

Total	$	616	$	728	$	6,404	$	1,602

Included in the Other Test Systems segment are charges for the following (in thousands):


	For the Three Months Ended				For the Six Months Ended
	July 3, 2005		July 4, 2004		July 3, 2005		July 4, 2004
Cost of revenues—inventory	$	299	$	75	$	441	$	344
Restructuring and other charges		246		—		194		59

Total	$	545	$	75	$	635	$	403

Included in the Corporate and Eliminations segment are charges for the following (in thousands):


	For the Three Months Ended					For the Six Months Ended
	July 3, 2005		July 4, 2004			July 3, 2005		July 4, 2004
Other income and expense, net	$	—	$	(585	)	$	—	$	(585	)
Restructuring and other charges		6,980		276			6,978		998

Total	$	6,980	$	(309	)	$	6,978	$	413

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

M. Commitments and Contingencies

Legal Claims

On September 5, 2001, after Teradyne’s August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc., the former owners of those companies filed a complaint against Teradyne and two of its executive officers in the Federal District Court in San Diego, California, asserting securities fraud and breach of contract related to the acquisition. Pursuant to motions filed by Teradyne and by the plaintiffs, the District Court dismissed certain of the plaintiffs’ claims, granted partial summary judgment against them with respect to the breach of contract claim and denied their motion for reconsideration. The only claim that remained before the District Court from the original complaint related to an allegation of fraud in connection with the setting of the transaction price. On December 27, 2004, the plaintiffs voluntarily stipulated to the dismissal with prejudice of their remaining claims in the District Court, without having received any payment or other consideration from Teradyne. On February 2, 2005, the plaintiffs filed a notice of appeal from the District Court’s prior orders. The appeal is now pending before the U.S. Court of Appeals for the Ninth Circuit.

In 2001, Teradyne was designated as a “potentially responsible party” (“PRP”) at a clean-up site in Los Angeles, California. This claim arose out of Teradyne’s acquisition of Perception Laminates, Inc. in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated July 30, 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. Teradyne has asked the State of California to drop the PRP designation, but California has not yet agreed to do so.

On April 30, 2004, Hampshire Equity Partners II, LP (“HEP”) filed a complaint against Teradyne and Teradyne’s Connection Systems segment (“TCS”) in the United States District Court of the Southern District of New York, relating to HEP’s February 21, 2001 investment of $55 million in Connector Service Corporation (aka AMAX Plating, Inc.) (“CSC”), a supplier to TCS at the time. After CSC filed for bankruptcy protection on or about September 24, 2003, HEP brought suit against Teradyne and TCS asserting fraud and negligence based claims, and a claim for intentional interference with economic opportunity. In the complaint, HEP alleged that it relied on statements that a TCS representative made to HEP’s agent during due diligence, prior to its February 2001 investment in CSC. HEP sought to hold Teradyne and TCS responsible for its decision to invest in CSC, the losses that it suffered upon the bankruptcy of CSC and damages for an unstated amount of not less than $55 million. On or about April 7, 2005, the District Court entered an order allowing Teradyne’s motion to dismiss in full and denying HEP leave to amend and re-file its complaint. On May 6, 2005, HEP filed a notice of appeal from the District Court’s order to dismiss. The appeal is now pending before the U.S. Court of Appeals for the Second Circuit.

Teradyne believes that it has meritorious defenses against the above unsettled claims and intends to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, Teradyne believes the losses associated with all of these actions will not have a material adverse effect on its consolidated financial position or liquidity, but could possibly be material to its consolidated results of operations of any one period.

In addition, Teradyne is subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. Although there can be no assurance, there are no such matters pending that Teradyne expects to be material with respect to its business, financial position or results of operations.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Guarantees and Indemnification Obligations

For “Guarantees and Indemnification Obligations,” see Note J: “Commitments and Contingencies” in our Annual Report on Form 10-K for the year ended December 31, 2004.

N. Subsequent Event

On July 12, 2005, Teradyne initiated actions to reduce its workforce by notifying approximately 400 employees from the Semiconductor Test Division that their employment is being terminated as part of Teradyne’s ongoing effort to lower expenses. The terminations are expected to be completed by fiscal year end 2005, and to result in total cash severance charges of approximately $12.7 million and $4.0 million, respectively for the third and fourth quarters, for a total cash severance charge of approximately $16.7 million for the second half of fiscal year 2005.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS


	For the Three Months Ended						For the Six Months Ended
	July 3, 2005			July 4, 2004			July 3, 2005			July 4, 2004
	(in thousands)						(in thousands)
Net revenue	$	320,172		$	526,463		$	625,753		$	957,066

Net (loss) income		(45,464	)		80,493			(98,036	)		120,740

Percentage of net revenues:
Products		84.2	%		88.7	%		84.0	%		87.8	%
Services		15.8			11.3			16.0			12.2

Net revenues		100			100			100			100
Cost of revenues:
Cost of products		56.5			49.3			56.7			49.6
Cost of services		12.9			7.7			13.4			8.3

Gross profit		30.6			43.0			29.9			42.1
Operating expenses:
Engineering and development		19.0			12.7			20.0			13.8
Selling and administrative		21.1			13.3			21.2			14.2
Restructuring and other charges		3.4			—			3.5			—
Gain on sale of business		(0.2	)		(0.2	)		(0.1	)		(0.1	)

Operating expenses		43.3			25.8			44.6			27.9

(Loss) income from operations		(12.6	)		17.2			(14.6	)		14.2
Interest income		1.2			0.7			1.3			0.7
Interest expense		(1.3	)		(1.0	)		(1.4	)		(1.0	)
Other income and expense, net		—			0.1			—			0.1

(Loss) income before income taxes		(12.7	)		17.0			(14.7	)		14.0
Provision for income taxes		1.5			1.7			1.0			1.4

Net (loss) income		(14.2	)%		15.3	%		(15.7	)%		12.6	%

Provision for income taxes as a percentage of (loss) income before income taxes		(11.4	)%		10.0	%		(6.7	)%		10.0	%

Results of Operations

Second Quarter 2005 Compared to Second Quarter 2004

Bookings

Net bookings for our four principal reportable segments were as follows (in millions, except percent change):


	For the Three Months Ended				% Change
	July 3, 2005		July 4, 2004		% Change
Semiconductor Test Systems	$	180.4	$	386.8	(53.4	)%
Connection Systems		96.6		108.2	(10.7	)
Assembly Test Systems		48.7		43.5	12.0
Other Test Systems		23.3		19.4	20.1

	$	349.0	$	557.9	(37.4	)%

The Semiconductor Test Systems decrease in orders was primarily driven by a decrease in overall system-on-a-chip (“SOC”) tester market demand since the beginning of the third quarter of 2004, due to a lack of need for increased capacity from our customers.

The decrease in orders in Connection Systems was caused by a decrease in demand in the wireless market segment across both connection and backplane assembly products.

The increase in orders in Assembly Test Systems was attributable to a strong increase in our military/aerospace (“mil/aero”) business.

The increase in Other Test Systems’ orders resulted from a strong increase in Broadband Test Systems, offset by a decrease in Diagnostic Systems. Other Test Systems’ bookings are program related and have significant fluctuations.

Cancellations for our four principal reportable segments were $4.4 million and $0 million for the three months ended July 3, 2005 and July 4, 2004, respectively. All of the cancellations were attributable to the Semiconductor Test segment.

Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. In the second quarter of 2005 and 2004, there were no significant cancellation penalties received. Due to possible changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules and/or cancellations of backlog during any particular period could have a material adverse effect on our business, financial condition and results of operations.

Net bookings by region as a percentage of total net bookings were as follows:


	For the Three Months Ended
	July 3, 2005		July 4, 2004
United States	35	%	26	%
Taiwan	5		18
South East Asia	19		18
Singapore	5		18
Europe	18		12
Japan	9		4
Korea	4		4
Rest of the World	5		0

	100	%	100	%

Backlog of unfilled orders for our four principal reportable segments was as follows (in millions):


	For the Three Months Ended
	July 3, 2005		July 4, 2004
Semiconductor Test Systems	$	259.1	$	457.3
Connection Systems		87.9		93.3
Assembly Test Systems		74.6		61.5
Other Test Systems		50.6		48.3

	$	472.2	$	660.4

Revenue

Net revenues for our four principal reportable segments were as follows (in millions, except percent changes):


	For the Three Months Ended				% Change
	July 3, 2005		July 4, 2004		% Change
Semiconductor Test Systems	$	163.6	$	361.7	(54.7	)%
Connection Systems		94.0		99.1	(5.1	)
Assembly Test Systems		38.0		39.1	(2.8	)
Other Test Systems		24.6		26.6	(7.5	)

	$	320.2	$	526.5	(39.2	)%

The decrease in Semiconductor Test Systems revenue was primarily driven by a decrease in overall system-on-a-chip (“SOC”) tester market demand since the beginning of the third quarter of 2004, due to a lack of need for increased capacity from our customers.

The decrease in Connection Systems revenue was caused by a decrease in demand in the wireless market segment across both connection and backplane assembly products.

Our sales by region as a percentage of total net sales were as follows:


	For the Three Months Ended
	July 3, 2005		July 4, 2004
United States	33	%	25	%
South East Asia	20		21
Taiwan	7		17
Europe	16		16
Singapore	6		15
Japan	5		4
Korea	5		2
Rest of the World	8		—

	100	%	100	%

Gross Margin

Our gross profit was as follows (dollars in millions):


	For the Three Months Ended						Period Change
	July 3, 2005			July 4, 2004			Period Change
Gross Profit	$	98.2		$	226.6		$	(128.4	)
Percent of Total Revenue		30.6	%		43.0	%		(12.4	)%

The reduction in product gross margin from the second quarter of 2004 to 2005 was primarily a result of the reduction in Semiconductor Test Systems sales volume. Other factors that contributed to the decrease were a shift in product mix within Semiconductor Test Systems, pricing and system configurations. These other factors generally improve at higher levels of shipments as the new products become more populated with greater instrumentation. Service gross margins decreased primarily due to a decline in new system shipments while much of the service costs are fixed in nature.

We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory provisions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next four quarters, is written down to estimated net realizable value.

The provisions for excess and obsolete inventory were $2.2 million and $2.3 million for the three months ended July 3, 2005 and July 4, 2004, respectively. During the three months ended July 3, 2005, we scrapped $16.3 million of inventory and sold $0.4 million of previously written-down or written-off inventory. As of July 3, 2005, we have inventory related reserves for amounts which had been written-down or written-off of $136.6 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows (dollars in millions):


	For the Three Months Ended						Period Change
	July 3, 2005			July 4, 2004			Period Change
Engineering and Development	$	60.9		$	66.9		$	(6.0	)
Percent of Total Revenue		19.0	%		12.7	%		6.3	%

The decrease of $6.0 million in engineering and development expenses is due to the decrease in spending on the FLEX platform, and a decrease in variable employee compensation.

Selling and Administrative

Selling and administrative expenses were as follows (dollars in millions):


	For the Three Months Ended						Period Change
	July 3, 2005			July 4, 2004			Period Change
Selling and Administrative	$	67.5		$	70.0		$	(2.5	)
Percent of Total Revenue		21.1	%		13.3	%		7.8	%

The decrease of $2.5 million in selling and administrative spending is due primarily to a $6.4 million decrease in variable employee compensation, offset by a $1.9 million increase in salaries and fringe benefits due to salary increases effective July, 1 2004, and a $2.0 million increase due to increased sales support spending for the FLEX platform.

Restructuring and Other Charges, Net

The tables below represent activity related to restructuring charges for the three months ended July 3, 2005 and July 4, 2004. The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid out over the lease terms, the latest of which expires in 2012. We expect to pay out approximately $4.9 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $13.5 million as of July 3, 2005. We have subleased approximately 74% of our unoccupied space as of July 3, 2005 and are actively working to sublease the remaining space.

The table below summarizes the liability and activity for the three months ended July 3, 2005 relating to restructuring and other charges, net (in thousands):


	Long-Lived Asset Impairment			Severance and Benefits			Gain on Sale of Land and Building			Facility Related			Other Charges		Total
Balance at April 3, 2005	$	—		$	5,962		$	—		$	23,217		$	1,857	$	31,036
Second quarter 2005 provision		9,157			4,622			(4,445	)		896			577		10,807
Cash payments		—			(4,156	)		4,445			(3,082	)		856		(1,937	)
Asset write-downs		(9,157	)		—			—			—			—		(9,157	)

Balance at July 3, 2005	$	—		$	6,428		$	—		$	21,031		$	3,290	$	30,749

During the three months ended July 3, 2005, Teradyne recorded the following activities related to restructuring and other charges, net:

•

$4.6 million related to severance and related benefits for 160 people terminated in the Semiconductor Test Systems, Connection Systems and Other Test Systems segments in all functional areas.

•

$4.4 million of gains on the sale of a Corporate building in North Reading, MA and land held by Semiconductor Test Systems in Japan.

•

$0.6 million of other charges consisting of a $0.5 million reversal of a charge taken in the prior quarter for contractual penalties associated with resizing the Connection Systems segment, $0.5 million of earn out payments received in the Assembly Test Systems and Other Test Systems segments, offset by a $1.5 million charge for transactional-related costs at Corporate.

The restructuring actions taken in the second three months of 2005 are expected to generate cost savings of approximately $3.6 million quarterly across Semiconductor Test Systems and Connection Systems.

The table below summarizes the liability and activity for the three months ended July 4, 2004 relating to restructuring and other charges, net (in thousands):


	Long-Lived Asset Impairment			Severance and Benefits			Facility Related			Other Charges			Total
Balance at April 4, 2004	$	—		$	4,590		$	28,079		$	1,273		$	33,942
Second quarter 2004 (reversal) provision		(100	)		(458	)		1,201			(491	)		152
Cash payments		—			(1,868	)		(5,880	)		375			(7,373	)
Asset write-downs		100			—			—			—			100

Balance at July 4, 2004	$	—		$	2,264		$	23,400		$	1,157		$	26,821

During the three months ended July 4, 2004, Teradyne revised its estimates on future benefits for severed employees, decreasing the current provision by approximately $0.8 million. This revision is offset by charges taken for severance and related benefits of $0.3 million for the three months ended July 4, 2004. There were 23 employees terminated in the second quarter of 2004, all of whom had been employed in the IT department. As of July 4, 2004, $2.3 million in severance and benefits remain unpaid and included in accrued employees’ compensation and withholdings.

Gain on Sale of Business

During the three months ended July 3, 2005 and July 4, 2004, Teradyne recorded, as a gain on the sale of a business, proceeds of $0.6 million and $0.9 million, respectively, from the previous sale of certain assets and product lines. These amounts relate to an earn out provision from a divestiture in the Connection Systems segment in 1999.

Interest Income and Expense

Interest income increased slightly to $3.8 million for the second quarter of 2005 from $3.5 million in the second quarter of 2004, due to higher interest rates partially offset by a reduction in marketable securities. Interest expense decreased to $4.2 million in the second quarter of 2005 from $4.9 million in the second quarter of 2004, due to lower interest payments on convertible debt as a result of repurchases made.

Other Income and Expense, Net

Other income and expense, net, for the three months ended July 3, 2005 and July 4, 2004, respectively, includes the following (in thousands):


	For the three months ended
	July 3, 2005		July 4, 2004
Repayment of loan (1)	$	—	$	585
Fair value adjustment on warrants		—		(159	)

Total	$	—	$	426

(1)	The loan had previously been valued at zero due to its uncertainty of collection.

Income Taxes

As a result of incurring significant operating losses from 2001 through 2003, we determined that it is more likely than not that our deferred tax assets may not be realized, and since the fourth quarter of 2002 we have established a full valuation allowance for our net deferred tax assets. If we generate sustained future taxable income against which these tax attributes may be applied, some portion or all of the valuation allowance would be reversed. If the valuation allowance were reversed, a portion would be recorded as an increase to additional paid in capital, and the remainder would be recorded as a reduction to income tax expense. The tax provision in the second quarter of 2005 consists of taxes incurred in foreign locations, including $1.0 million related to the sale of land in Japan. The tax expense for the second quarter of 2004 consists of amounts recorded for foreign taxes.

Six Months of 2005 Compared to Six Months of 2004

Bookings

Net bookings for our four principal reportable segments were as follows (in millions, except percent change):


	For the Six Months Ended				Percent Change
	July 3, 2005		July 4, 2004		Percent Change
Semiconductor Test Systems	$	346.2	$	759.2	(54.4	)%
Connection Systems		196.5		210.7	(6.7	)
Assembly Test Systems		86.6		77.2	12.2
Other Test Systems		60.4		62.0	(2.6	)

	$	689.7	$	1,109.1	(37.8	)%

The decrease in orders in Connections Systems was caused by a decrease in demand in the wireless market segment across both connection and backplane assembly products.

The increase in orders in Assembly Test Systems was attributable to a strong increase in our military/aerospace (“mil/aero”) business, primarily the result of earlier wins of large multiyear programs.

The slight decrease in Other Test Systems’ orders resulted from an increase in Diagnostic Systems, offset by a decrease in Broadband Test Systems. Other Test Systems’ bookings are program related and have significant fluctuations.

Cancellations for our four principal reportable segments were $5.7 million from Semiconductor Test Systems and $0.2 million from Assembly Test Systems for the six months ended July 3, 2005 and July 4, 2004, respectively.

Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. In the first half of 2005 and 2004, there were no significant cancellation penalties received. Due to possible changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules and/or cancellations of backlog during any particular period could have a material adverse effect on our business, financial condition and results of operations.

Net bookings by region as a percentage of total net bookings were as follows:


	For the Six Months Ended
	July 3, 2005		July 4, 2004
United States	37	%	27	%
South East Asia	18		20
Taiwan	6		19
Europe	18		15
Singapore	7		14
Japan	8		4
Rest of the World	6		1

	100	%	100	%

Revenue

Net revenues for our four principal reportable segments were as follows (in millions, except percent changes):


	For the Six Months Ended				% Change
	July 3, 2005		July 4, 2004		% Change
Semiconductor Test Systems	$	311.5	$	635.8	(51	)%
Connection Systems		189.2		194.4	(3	)
Assembly Test Systems		75.9		72.5	5
Other Test Systems		49.2		54.4	(10	)

	$	625.8	$	957.1	(35	)%

The decrease in Semiconductor Test Systems revenue was primarily driven by a decrease in overall SOC tester market demand since the beginning of the third quarter of 2004, due to a lack of need for increased capacity from our customers.

The decrease in Connection Systems revenue was caused by a decrease in demand in the wireless market segment across both connection and backplane assembly products.

The increase in Assembly Test System sales was attributable to an increase in the mil/aero business, the result of earlier wins of large multiyear programs.

Our sales by region as a percentage of total net sales were as follows:


	For the Six Months Ended
	July 3, 2005		July 4, 2004
United States	36	%	29	%
Europe	15		17
South East Asia	19		17
Singapore	7		15
Taiwan	6		15
Japan	6		4
Korea	4		3
Rest of the World	7		—

	100	%	100	%

Gross Margin

Our gross profit was as follows (dollars in millions):


	For the Six Months Ended						Period Change
	July 3, 2005			July 4, 2004			Period Change
Gross Profit	$	187.3		$	402.6		$	(215.3	)
Percent of Total Revenue		29.9	%		42.1	%		12.2	%

The reduction in product gross margin from the first half of 2004 to 2005 was primarily a result of the reduction in Semiconductor Test Systems sales volume. Other factors that contributed to the decrease were a shift in

product mix within Semiconductor Test Systems, pricing and system configurations. These other factors generally improve at higher levels of shipments as the new products become more populated with greater instrumentation. Service gross margins are down primarily due to a decline in new system shipments while much of the service costs are fixed in nature.

The provisions for excess and obsolete inventory were $4.8 million and $6.6 million for the six months ended July 3, 2005 and July 4, 2004, respectively. During the six months ended July 3, 2005, we scrapped $22.1 million of inventory and sold $0.4 million of previously written-down or written-off inventory. As of July 3, 2005, we have inventory related reserves for amounts which had been written-down or written-off of $136.6 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows (dollars in millions):


	For the Six Months Ended						Period Change
	July 3, 2005			July 4, 2004			Period Change
Engineering and Development	$	125.1		$	131.6		$	(6.5	)
Percent of Total Revenue		20.0	%		13.8	%		6.2	%

The decrease of $6.5 million in engineering and development expenses is due to the decreased spending on the FLEX platform, and a decrease in variable employee compensation.

Selling and Administrative

Selling and administrative expenses were as follows (dollars in millions):


	For the Six Months Ended						Period Change
	July 3, 2005			July 4, 2004			Period Change
Selling and Administrative	$	132.8		$	136.2		$	(3.4	)
Percent of Total Revenue		21.2	%		14.2	%		7.0	%

The decrease of $3.4 million in selling and administrative spending is due primarily to a $6.4 million decrease in variable employee compensation, offset by an increase in salaries and fringe benefits due to salary increases effective July, 1 2004, and increased sales support spending for the FLEX platform.

Restructuring and Other Charges, Net

The tables below represent activity related to restructuring charges for the six months ended July 3, 2005 and July 4, 2004. The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid out over the lease terms, the latest of which expires in 2012. We expect to pay out approximately $4.9 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $13.5 million as of July 3, 2005. We have subleased approximately 74% of our unoccupied space as of July 3, 2005 and are actively working to sublease the remaining space.

The table below summarizes the liability and activity for the six months ended July 3, 2005 relating to restructuring and other charges, net (in thousands):


	Severance and Benefits			Long-Lived Asset Impairment			Gain on Sale of Land and Building			Facility Related			Other Charges		Total
Balance at December 31, 2004	$	3,060		$	—		$	—		$	21,228		$	1,029	$	25,317
First six months 2005 provision		11,705			9,752			(4,445	)		3,432			991		21,435
Cash payments		(8,337	)		—			4,445			(3,629	)		1,270		(6,251	)
Asset write-downs		—			(9,752	)		—			—			—		(9,752	)

Balance at July 3, 2005	$	6,428		$	—		$	—		$	21,031		$	3,290	$	30,749

During the six months ended July 3, 2005, Teradyne recorded the following activities related to restructuring and other charges, net:

•

$4.4 million in gains on the sale of a Corporate building in North Reading, MA and land held by Semiconductor Test Systems in Japan.

•

$1.0 million of other charges consisting of a $0.3 million charge for contractual penalties associated with resizing the Connection Systems segment and a $1.5 million charge for transactional related costs at Corporate offset by $0.8 million of earn out payments received in the Assembly Test Systems and Other Test Systems segments.

The restructuring actions taken in the first six months of 2005 are expected to generate cost savings of approximately $7.9 million quarterly across Semiconductor Test Systems, Connection Systems, Assembly Test Systems and Other Test Systems.

The table below summarizes the liability and activity for the six months ended July 4, 2004 relating to restructuring and other charges, net (in thousands):


	Long-Lived Asset Impairment			Severance and Benefits			Facility Related			Other Charges			Total
Balance at December 31, 2003	$	—		$	7,766		$	29,222		$	1,273		$	38,261
First six months 2004 (reversal) provision		(603	)		(760	)		2,136			(491	)		282
Cash payments		—			(4,742	)		(7,958	)		375			(12,325	)
Asset write-downs		603			—			—			—			603

Balance at July 4, 2004	$	—		$	2,264		$	23,400		$	1,157		$	26,821

During the six months ended July 4, 2004, Teradyne recorded a charge of $2.1 million, of which $1.2 million consisted of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term and $0.9 million for settlement of the remaining lease obligation on a facility. The Semiconductor Test Systems segment recorded $0.2 million, the Connection Systems segment recorded $0.9 million, and $1.0 million of the charge was recorded in the Assembly Test segment.

During the six months ended July 4, 2004, Teradyne revised its estimates on future benefits for severed employees, decreasing the current provision by approximately $1.9 million. This revision was offset by charges taken for severance and related benefits for $1.1 million in the six months ended July 4, 2004. There were 36 employees terminated in the first and second quarter of 2004 across all functional groups.

Gain on Sale of Business

During the six months ended July 3, 2005 and July 4, 2004, Teradyne recorded, as a gain on the sale of a business, proceeds of $0.6 and $0.9 million, respectively, from the previous sale of certain assets and product lines. These amounts relate to an earn out provision from a divestiture in the Connection Systems segment in 1999.

Interest Income and Expense

Interest income increased to $8.2 million for the first six months of 2005 from $7.1 million in the first six months of 2004 due to higher interest rates. Interest expense decreased to $8.6 million in the first six months of 2005 from $9.5 million in the first six months of 2004 due to lower interest payments on convertible debt as a result of repurchases made.

Other Income and Expense, Net

Other income and expense, net for the six months ended July 3, 2005 and July 4, 2004, respectively, includes the following (in thousands):


	For the six months ended
	July 3, 2005		July 4, 2004
Repayment of loan (1)	$	—	$	585
Gain on sale of an investment		—		1,058
Fair value adjustment on warrants		—		(366	)

Total	$	—	$	1,277

(1)	The loan had previously been valued at zero due to its uncertainty of collection.

Income Taxes

As a result of incurring significant operating losses from 2001 through 2003, we determined that it is more likely than not that our deferred tax assets may not be realized, and since the fourth quarter of 2002 we have established a full valuation allowance for our net deferred tax assets. If we generate sustained future taxable income against which these tax attributes may be applied, some portion or all of the valuation allowance would be reversed. If the valuation allowance were reversed, a portion would be recorded as an increase to additional paid in capital, and the remainder would be recorded as a reduction to income tax expense. The tax provision for the first half of 2005 consists of taxes incurred in foreign locations, including $1.0 million related to the sale of land in Japan, combined with audit settlements with the Internal Revenue Service and the state of California. The tax expense for the first half of 2004 consists of amounts recorded for foreign taxes.

On October 22, 2004, the President signed the Jobs Act, which creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations.

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balance decreased $141.8 million in the first six months of 2005, to $549.4 million. Cash activity for the first six months of 2005 and 2004 was as follows (in millions):


	For the Six Months Ended
	July 3, 2005			July 4, 2004
Cash (used for) provided by operating activities:
Cash (used for) provided by net income (loss), adjusted for non-cash items	$	(28.8	)	$	191.8
Changes in operating assets and liabilities, net of product lines sold		(52.2	)		(72.8	)

Total cash (used for) provided by operating activities	$	(81.0	)	$	119.0
Cash provided by (used for) investing activities		63.0			(151.2	)
Cash provided by financing activities		7.9			28.1

Total cash used	$	(10.1	)	$	(4.1	)

Changes in operating assets and liabilities used cash of $52.2 million in the first six months of 2005 due primarily to a $56.8 million decrease in accounts payable, deferred revenue and accrued expenses from employee compensation accruals that were paid out at the beginning of the year. Accounts receivable balances increased $11.8 million, primarily in the Semiconductor Test Systems segment, due to an increase in days sales outstanding (“DSO”) from 51 days as of July 4, 2004 to 67 days as of July 3, 2005. The increase in DSO year over year is mainly related to the timing of sales. Inventory decreased $33 million in the first six months of 2005 due primarily to volume decreases in our Semiconductor Test Systems segment. We contributed $20 million to the U.S. Qualified Pension Plan, and we plan to contribute up to an additional $10 million in the remainder of 2005. Changes in operating assets and liabilities used cash of $72.8 million in the first six months of 2004, primarily due to an increase in accounts receivable and inventory balances offset by an increase in accounts payable, deferred revenue and accrued expenses.

Investing activities consist of the purchase, sale and maturity of marketable securities, proceeds from the sale of business and product lines, proceeds from the sale of land and building and purchases of capital assets. Capital expenditures increased by $1.8 million in the first six months of 2005 compared to the first six months of 2004 across all operating segments, primarily due to an increase in spending on internally manufactured test systems, offset by decreased spending on externally purchased property, plant and equipment.

Financing activities represent the issuance of our common stock under employee plans and payments on our convertible senior notes and other long-term debt. The decrease of $20.2 million from the first six months of 2004 to the first six months of 2005 is due to the repurchase of $20 million of our convertible senior notes in the six months ended July 3, 2005. The decision to repurchase a portion of our notes was based on the fair market value of the notes being below face value during the period.

We believe our cash, cash equivalents and marketable securities balance of $549.4 million will be sufficient to meet working capital and expenditure needs for at least the next twelve months. Inflation has not had a significant long-term impact on earnings.

Subsequent Event

On July 12, 2005, we initiated actions to reduce our workforce by notifying approximately 400 employees from the Semiconductor Test Division that their employment is being terminated as part of Teradyne’s ongoing effort to lower expenses. The terminations are expected to be completed by fiscal year end 2005, and to result in total cash severance charges of approximately $12.7 million and $4.0 million, respectively for the third and fourth quarters, for a total cash severance charge of approximately $16.7 million for the second half of fiscal year 2005.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”). In annual periods beginning after June 15, 2005, SFAS 123R would eliminate the ability to account for equity-based compensation using the intrinsic value-based method under APB 25. SFAS 123R requires companies to record in their Statements of Operations equity-based compensation expense for stock compensation awards based on the fair value of the equity instrument at the time of grant. We expect to adopt SFAS 123R beginning in the first quarter of 2006, as required, using the Modified Prospective method, and will not restate prior periods for the adoption of SFAS 123R.

Currently, we disclose pro forma net (loss) income and related pro forma net (loss) income per share in accordance with SFAS No. 123 and SFAS No. 148. Under SFAS 123R, equity-based compensation expense is required to be recognized in companies’ financial statements. On May 26, 2005, the Board of Directors approved the accelerated vesting of certain outstanding, unvested “out of the money” stock awarded to employees, officers and other eligible participants under our various stock option plans. The stock options that were accelerated had exercise prices that were in excess of $13.26, the closing price of Teradyne’s common stock on the New York Stock Exchange on May 26, 2005 and ranged in exercise price from $13.73 to $41.37 per share. Options to purchase approximately 7.6 million shares became exercisable immediately as a result of the vesting acceleration. No compensation expense was recorded in the Company’s Condensed Consolidated Statements of Operations for the three and six months ended July 3, 2005 related to this action as these options had no intrinsic value on May 26, 2005.

Teradyne will be required to implement the expense recognition provisions of SFAS 123R starting with the first quarter of its fiscal year 2006 that begins on January 1, 2006. As a result of the acceleration, Teradyne will reduce compensation expense it otherwise would be required to record by approximately $48.6 million on a pre-tax basis over fiscal years 2006, 2007 and 2008.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 modifies the accounting for abnormal inventory costs, and the manner in which companies allocate fixed overhead expenses to inventory. SFAS 151 is effective for inventory costs incurred during annual periods beginning after June 15, 2005. We do not expect SFAS 151 to have a material impact on our financial position and results of operations.

Certain Factors That May Affect Future Results

From time to time, information we provide, statements made by our employees or information included in our filings with the Securities and Exchange Commission (the “Commission”) (including this Form 10-Q) contain statements that are not purely historical, but are forward looking statements, made under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) which involve risks and uncertainties. In particular, forward looking statements made herein include projections, plans and objectives for our business, financial condition, operating results, future operations, or future economic performance, statements relating to the sufficiency of capital to meet working capital requirements, capital expenditures, including future lease payments

and commitments and contributions to our pension plan, expectations as to customer orders and demand for our products and statements relating to backlog, bookings and cancellations, gross margins and pricing considerations. These statements are neither promises nor guarantees but involve risks and uncertainties, both known and unknown, which could cause our actual future results to differ materially from those stated in any forward looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. These factors, and others, are discussed from time to time in our filings with the Commission.

If We Fail to Develop New Technologies to Adapt to Our Customers’ Needs and if Our Customers Fail to Accept Our New Products, Our Revenues Will Be Adversely Affected.

We believe that our technological position depends primarily on the technical competence and creative ability of our engineers. In a rapidly evolving market, such as ours, the development of new technologies, commercialization of those technologies into products and market acceptance and customer demand for those products are critical to our success. Successful product development, introduction and acceptance depend upon a number of factors, including:

•

new product selection;

•

ability to meet customer requirements;

•

development of competitive products by competitors;

•

timely and efficient completion of product design;

•

timely and efficient implementation of manufacturing;

•

timely remediation of product performance issues, if any, identified during testing;

•

assembly processes and product performance at customer locations;

•

differentiation of our products from our competitors’ products; and

•

management of expected product capabilities and product life cycles.

We Are Subject to Intense Competition.

We face significant competition throughout the world in each of our operating segments. Some of our competitors have substantial financial and other resources to pursue engineering, manufacturing, marketing and distribution of their products. We also face competition from internal suppliers at several of our customers. Some of our competitors have introduced or announced new products with certain performance characteristics which may be considered equal or superior to those we currently offer. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved cost of ownership and performance characteristics. New product introductions by competitors could cause a decline in revenues or loss of market acceptance of our products. Moreover, increased competitive pressure could lead to intensified price based competition, which could materially adversely affect our business, financial condition and results of operations.

We Are Subject to Risks of Operating Internationally.

A significant portion of our total revenue is derived from customers outside the United States. Our international sales and operations are subject to significant risks and difficulties, including:

•

unexpected changes in legal and regulatory requirements and in policy changes affecting international markets;

•

changes in tariffs and exchange rates;

•

social, political and economic instability, acts of terrorism and international conflicts;

•

difficulties in accounts receivable collection;

•

cultural differences in the conduct of business;

•

difficulties in staffing and managing international operations;

•

potentially adverse tax consequences; and

•

compliance with customs regulations.

In addition, an increasing portion of our products are sourced or manufactured in foreign locations, including China, and a large portion of the devices our products test are fabricated and tested by foundries and subcontractors in Taiwan, Singapore, China and other parts of Asia. As a result, we are subject to a number of economic and other risks, particularly during times of political or financial instability in these regions. Disruption of manufacturing or supply sources in these international locations could materially adversely impact our ability to fill customer orders and potentially result in lost business.

If Our Suppliers do not Meet Product or Delivery Requirements, We Could Have Reduced Revenues and Earnings.

Certain components, including semiconductor chips, may be in short supply from time to time because of high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements. Approximately 30% of material purchases require some custom work where having multiple suppliers would be cost prohibitive. If any of our suppliers were to cancel contracts or commitments or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on our business, results of operations and financial condition. In addition, we rely on contract manufacturers for certain subsystems used in our products, and our ability to meet customer orders for those products depends upon the timeliness and quality of the work performed by these subcontractors, over whom we do not exercise any control.

We are also dependent on the financial strength of our suppliers and may be subject to litigation arising from our relationships with suppliers and others. There can be no assurance that the loss of suppliers either as a result of bankruptcy or otherwise will not have a material adverse effect on our business, results of operations or financial condition.

Our Business Is Impacted by Worldwide Economic Cycles, Which Are Difficult to Predict.

Capital equipment providers in the electronics and semiconductor industries, such as Teradyne, have, in the past, been negatively impacted by sudden slowdowns in the global economies, and resulting reductions in customer capital investments. The duration of the current slowdown in global economies and reductions in customer capital investments and any future slowdowns and reductions, which may adversely impact our business, are difficult to predict.

Acts of War, Terrorists Attacks and the Threat of Domestic and International Terrorist Attacks May Adversely Impact Our Business.

Acts of war and terrorists attacks may cause damage or disruption to our employees, facilities, customers, suppliers and distributors which could have a material adverse effect on our business, results of operation or financial condition. As we sell and manufacture products both in the United States and internationally, the threat of future terrorist attacks could lead to changes in security and operations at those locations which could increase our operating costs and which may adversely affect our business. Such conflicts may also cause damage or disruption to transportation and communication systems. All of these conditions make it difficult for us, and our customers, to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and results of operations.

Our Business is Dependent on the Current and Anticipated Market for Electronics, Which Historically Have Been Highly Cyclical.

Our business and results of operations depend in significant part upon capital expenditures of manufacturers of semiconductors and other electronics, which in turn depend upon the current and anticipated market demand for those products. The market demand for electronics is impacted by economic slowdowns and the effects of hostile acts. Historically, the electronics and semiconductor industry has been highly cyclical with recurring periods of over-supply, which often have had a severe negative effect on demand for test equipment, including systems we manufacture and market. We believe that the markets for newer generations of electronic products such as those that we manufacture and market will also be subject to similar fluctuations. We are dependent on the timing of orders from our customers and the deferral or cancellation of previous customer orders could have an adverse effect on our results of operations. We cannot assure that the level of revenues or new orders for a calendar quarter will be sustained in subsequent quarters. In addition, any factor adversely affecting the electronics industry or particular segments within the electronics industry may adversely affect our business, financial condition and operating results.

We Have Taken Measures to Address the Slowdown in the Market for Our Products Which Could Have Long-term Negative Effects on Our Business.

During the last four calendar years and in the first and second quarters of 2005, we took measures to address slowdowns in the market for our products. In particular, we reduced our workforce, closed and/or sold facilities, discontinued certain product lines, implemented material cost reduction programs and reduced planned capital expenditures and expense budgets. Each measure we took to address such slowdowns could have long-term negative effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products, increasing our debt, and making it more difficult to hire and retain talented individuals and respond to customers or competitors, as the market and customer orders turn around.

We May Not Be Able to Adequately Address a Rapid Increase in Customer Demand.

Because we took measures in recent years and in the first and second quarters of 2005 to scale back operations and reduce expenses in response to decreased customer demand for our products and services, we may not be able to satisfy a rapid increase in customer demand. Our ability to meet rapid increases in customer demand is also, to a certain extent, dependant upon the ability of our suppliers and contractors to meet increased product or delivery requirements, many of which have also implemented cost reduction strategies and over which we have little or no control.

Our Business May Be Adversely Impacted by Acquisitions Which May Affect Our Ability to Manage and Maintain Our Business.

Since our inception, we have acquired a number of businesses. In the future, we may undertake additional acquisitions of businesses that complement our existing operations. Such past or future acquisitions could involve a number of risks, including:

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the diversion of the attention of management and other key personnel;

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the costs associated with and/or the inability to effectively integrate an acquired business into our culture, product and service delivery methodology and other standards, controls, procedures and policies;

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the inability to retain the management, key personnel and other employees of an acquired business;

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the inability to retain the customers of an acquired business;

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the possibility that our reputation will be adversely affected by customer satisfaction problems of an acquired business;

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potential known or unknown liabilities associated with an acquired business, including but not limited to regulatory, environmental, internal controls and tax liabilities;

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significant underperformance of the acquired business relative to our expectations;

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the amortization of acquired identifiable intangibles, which may adversely affect our reported results of operations; and

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litigation which has or which may arise in the future in connection with such acquisitions.

For example, in connection with the August 2000 acquisition of each of Herco Technology Corp., a California company, and Perception Laminates, Inc., a California company, a complaint was filed on or about September 5, 2001 and is now pending, on appeal, before the U.S. Court of Appeals for the Ninth Circuit by the former owners of those companies naming as defendants Teradyne and two of our executive officers. This case is further described in “Part II, Item 1: Legal Proceedings” in this Form 10-Q.

Additionally, in 2001, we were designated as a “potentially responsible party” at a clean-up site in Los Angeles, California. This claim arises out of our acquisition of Perception Laminates, Inc. in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated July 30, 1992. This matter is further described in “Part II, Item 1: Legal Proceedings” in this Form 10-Q.

Our Business May be Adversely Impacted by Divestitures of Lines of Business Which May Affect Our Ability to Manage and Maintain Our Business.

Since our inception, we have divested certain lines of business. In the future, we may undertake additional such divestitures. Such past or future divestitures could involve a number of risks, including:

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the diversion of the attention of management and other key personnel;

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disruptions and other effects caused by the divestiture of a line of business on our culture, product and service delivery methodology and other standards, controls, procedures and policies;

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customer claims and satisfaction problems caused by the loss of a divested line of business;

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restructuring, inventory and other charges which may affect our results of operations;

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the decreased diversification of our product lines caused by the divestiture of a line of business which may make our operating results subject to increased market fluctuations;

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retained liabilities related to the divested business and indemnification obligations related to the divestiture;

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costs associated with difficulties in the separation of operations, services, products and personnel; and

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loss of key employees.

We Currently Are and in the Future May Be Subject to Litigation that Could Have an Adverse Effect on Our Business.

From time to time, we may be subject to litigation or other administrative and governmental proceedings that could require significant management time and resources and cause us to incur expenses and, in the event of an adverse decision, pay damages in an amount that could have a material adverse effect on our financial position or results of operations.

For example, on April 30, 2004, Hampshire Equity Partners II, L.P. (“HEP”), filed a complaint against Teradyne and Teradyne Connection Systems segment (“TCS”) asserting fraud and negligence based claims, and

a claim for intentional interference with economic opportunity. In the complaint, HEP alleged that it relied upon statements made by a representative of TCS to a HEP agent during its due diligence prior to investing $55 million in Connector Services Corporation (aka AMAX Plating, Inc.) (“CSC”). HEP sought to hold Teradyne and TCS responsible for its decision to invest in CSC and for the losses it has suffered upon the bankruptcy of CSC. HEP sought damages in an unstated amount exceeding $55 million. The District Court entered an order on or about April 7, 2005 allowing Teradyne’s motion to dismiss in full and denying HEP’s leave to amend and re-file its complaint. On May 6, 2005 HEP filed a notice of appeal from the District Court’s order to dismiss the case. The appeal is now pending before the U.S. Court of Appeals for the Second Circuit. This case is further described in “Part II, Item 1: Legal Proceedings” in this Form 10-Q.

If We Are Unable to Protect Our Intellectual Property, We May Lose a Valuable Asset or May Incur Costly Litigation to Protect Our Rights.

Our products incorporate technology that we protect in several ways, including patents, copyrights, trade secrets and by contract (“IP”). However, even with these protections, our IP may still be challenged, invalidated or subject to other infringement actions. While we believe that our IP has value in the aggregate, no single element of our IP is in itself essential. If a significant portion of our IP is invalidated or ineffective, our business could be materially adversely affected. In addition, we receive notifications from time to time that we may be in violation of patents held by others. An assertion of patent infringement against us, if successful, could have a material adverse effect on our ability to sell our products, or require a significant use of management resources and necessitate a lengthy and expensive defense which could adversely affect our operating results.

Our Business May Suffer if We Are Unable to Attract and Retain Key Employees.

Competition for employees with skills we require is intense in the high technology industry. Our success will depend on our ability to attract and retain key technical employees. The loss of one or more key or other employees, our inability to attract additional qualified employees, or the delay in hiring key personnel could each have a material adverse effect on our business, results of operations or financial condition.

We May Incur Significant Liabilities if We Fail to Comply With Environmental Regulations.

We are subject to both domestic and international environmental regulations and statutory strict liability relating to the use, storage, discharge, site cleanup and disposal of hazardous chemicals used in our manufacturing processes. If we fail to comply with present and future regulations, or are required to perform site remediation, we could be subject to future liabilities or the suspension of production. Present and future regulations may also:

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restrict our ability to expand facilities;

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restrict our ability to ship certain products into the European Union;

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require us to modify our operations logistics;

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require us to acquire costly equipment; or

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require us to incur other significant costs and expenses.

Pursuant to present regulations and agreements, we are conducting groundwater and subsurface assessment and monitoring and are implementing remediation and corrective action plans for facilities located in California, Massachusetts and New Hampshire which are no longer conducting manufacturing operations. As of July 3, 2005, we have not incurred material costs as result of the monitoring and remediation steps taken at the California, Massachusetts and New Hampshire sites.

On January 27, 2003, the European Union adopted the following directives: (i) the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the “RoHS Directive”); and (ii) the Waste

Electrical and Electronic Equipment Directive (the “WEEE Directive”). Both the RoHs Directive and the WEEE Directive will alter the type and manner in which electronic equipment is imported, sold and handled in the European Union. Ensuring compliance with the RoHs Directive and the WEEE Directive and integrating compliance activities with our suppliers could result in additional costs and disruption to operations and logistics and thus, could have a negative impact on our business, operations and financial condition. For example, early compliance with the RoHs Directive by any of our suppliers could force Teradyne to participate in last time buy programs and to accelerate end of life timetables for existing products, each of which results in additional costs for Teradyne and disrupts existing operations and logistics. The RoHs Directive and the WEEE Directive will be become effective on July 6, 2006 and August 13, 2005, respectively.

We Have Substantial Indebtedness and We May Not Be Able to Pay Our Debt and Other Obligations.

On October 24, 2001, we completed a private placement of $400 million principal amount of 3.75% Convertible Senior Notes (the “Notes”) due October 15, 2006 and received net proceeds of $389 million. During the year ended December 31, 2004 and the first quarter of 2005, we took steps to reduce our indebtedness, including repurchasing $8.5 million and $20.0 million, respectively, of the Notes on the open market. As a result, as of July 3, 2005, we have approximately $371.5 million principal amount of outstanding indebtedness. The level of our indebtedness, among other things, could:

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make it difficult to make payments on our debt and other obligations;

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make it difficult to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

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require the dedication of a substantial portion of any cash flow from operations to service for indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures;

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limit our flexibility in planning for, or reacting to changes in our business and the industries in which we compete;

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place us at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resources; and

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make us more vulnerable in the event of a downturn in our business.

In 2006, the full principal amount of the outstanding indebtedness under the Notes and any interest accrued thereunder will become due. If our cash flow is inadequate to meet our obligations, including our obligations under the Notes, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the Notes in 2006 or certain of our other obligations, we would be in default under the terms thereof, which would permit the holders of those obligations to accelerate their maturity and also could cause defaults under future indebtedness we may incur. Any such default could have a material adverse effect on our business, prospects, financial position and operating results. In addition, we cannot assure that we would be able to repay amounts due in respect of the Notes if those obligations were to be accelerated following the occurrence of any other event of default as defined in the instruments creating those obligations. Moreover, we cannot assure that we will have sufficient funds or will be able to arrange for financing to pay the principal amount due on the Notes at maturity in 2006.

We May Not Be Able to Satisfy Certain Obligations in the Event of a Change in Control.

The indenture governing the Notes contains provisions that apply to a change in control of Teradyne. If a “change in control” occurs, the holders of the Notes have the right to require us to repurchase all of the Notes not previously called for redemption. The price that we are required to pay is 100% of the principal amount of the Notes to be repurchased, together with interest accrued but unpaid to, but excluding, the repurchase date. At our option and subject to the satisfaction of certain conditions, instead of paying the repurchase price in cash, we may

pay the repurchase price in common stock valued at 95% of the average of the closing prices of common stock for the five trading days immediately preceding and including the third trading day prior to the repurchase date. If we are required to repurchase the Notes, there is no guarantee that we will have enough funds to pay such amounts.

As a result, a change in control could have a material adverse effect on our business, results of operations or financial condition.

We May Need Additional Financing, Which Could Be Difficult to Obtain.

We expect that our existing cash and marketable securities and cash generated from operations will be sufficient to meet our cash requirements to fund operations and expected capital expenditures for the next twelve months. However, we have a finite amount of cash and in the event we may need to raise additional funds, due to losses, maturity of the Notes or other reasons, we cannot be certain that we will be able to obtain such additional financing on favorable terms, if at all. Further, if we issue additional equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. Future financings may place restrictions on how we operate our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures, which could seriously harm our business.

We Will Be Required to Account for Options Under Our Employee Stock Plans as a Compensation Expense, Which Will Adversely Affect Our Operating Results.

There has been an increasing public debate about the proper accounting treatment for employee stock options. We currently disclose pro forma compensation expense quarterly and annually by calculating the grants’ fair value and disclosing the impact on net (loss) income and net (loss) income per share in a footnote to the consolidated financial statements. SFAS 123R or any other future laws and regulations requiring us to record the fair value of all stock options as compensation expense in our consolidated statement of operations will adversely affect operating results. Note B: “Accounting Policies,” of the consolidated financial statements reflects the impact that such a change in accounting treatment would have had on net (loss) income and net (loss) income per share if it had been in effect during the six months ended July 3, 2005.

Provisions of Our Charter and By-Laws and Massachusetts Law Make a Takeover of Teradyne More Difficult.

Our basic corporate documents, our stockholder rights plan and Massachusetts law contain provisions that could discourage, delay or prevent a change in control, even if a change in control might be regarded as beneficial to some or all of our stockholders.

Our Operating Results Are Likely to Fluctuate Significantly.

Our annual operating results are affected by a wide variety of factors that could materially adversely affect revenues and profitability.

The following factors are expected to impact future operations:

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competitive pressures on selling prices;

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our ability to introduce and the market acceptance of new products planned for 2005 and beyond;

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changes in product revenue mix resulting from changes in customer demand;

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the level of orders received which can be shipped in a quarter resulting from the tendency of customers to wait until late in a quarter to commit to purchase due to capital expenditure approvals and constraints

occurring at the end of a quarter, or the hope of obtaining more favorable pricing from a competitor seeking the business;

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engineering and development investments relating to new product introductions in 2005 and beyond, and the expansion of manufacturing, outsourcing and engineering operations in Asia;

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the ability of our suppliers and subcontractors to meet product quality or delivery requirements needed to satisfy customer orders for our products, especially if product demand increases rapidly;

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provisions for excess and obsolete inventory relating to the lack of demand for and the discontinuance of products; and

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impairment charges for certain long-lived assets.

In particular, due to the introduction of a number of new, complex test systems in 2004 and the planned introduction of other systems in 2005 and beyond, there can be no assurance that we will not experience delays in shipment of our products or that our products will achieve customer acceptance.

As a result of the foregoing and other factors, we have and may continue to experience material fluctuations in future operating results on a quarterly or annual basis which could materially and adversely affect our business, financial condition, operating results and stock price.

We have Significant Guarantees and Indemnification Obligations

From time to time we make guarantees to customers regarding the performance of our products and guarantee certain indebtedness or performance obligations of our subsidiary and affiliate companies. We also have agreed to provide indemnification to our officers, directors, employees and agents, to the extent permitted by law, arising from certain events or occurrences while the officer, director, employee or agent, is or was serving at our request in such capacity. If we become liable under any of these obligations, it could materially and adversely affect our business, financial condition and operating results. For additional information regarding “Guarantees and Indemnification Obligations” see Note J: “Commitments and Contingencies” in our Annual Report on Form 10-K for the year ended December 31, 2004.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Item 7a., “Quantitative and Qualitative Disclosures About Market Risks,” in our Annual Report on Form 10-K filed with the Commission on March 16, 2005. There were no material changes in our exposure to market risk from those set forth in our Annual Report for the fiscal year ended December 31, 2004.

Item 4: Controls and Procedures.

As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

PART II. OTHER INFORMATION

Item 1: Legal Proceedings

On September 5, 2001, after Teradyne’s August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc., the former owners of those companies filed a complaint against Teradyne and two of its executive officers in the Federal District Court in San Diego, California, asserting securities fraud and breach of contract related to the acquisition. Pursuant to motions filed by Teradyne and by the plaintiffs, the District Court dismissed certain of the plaintiffs’ claims, granted partial summary judgment against them with respect to the breach of contract claim and denied their motion for reconsideration. The only claim that remained before the District Court from the original complaint related to an allegation of fraud in connection with the setting of the transaction price. On December 27, 2004, the plaintiffs voluntarily stipulated to the dismissal with prejudice of their remaining claim in the District Court, without having received any payment or other consideration from Teradyne. On February 2, 2005, the plaintiffs filed a notice of appeal from the District Court’s prior orders. The appeal is now pending before the U.S. Court of Appeals for the Ninth Circuit.

In 2001, we were designated as a “potentially responsible party” (“PRP”) at a clean-up site in Los Angeles, California. This claim arose out of Teradyne’s acquisition of Perception Laminates, Inc. in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated July 30, 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. We have asked the State of California to drop the PRP designation, but California has not yet agreed to do so.

We believe that we have meritorious defenses against the above unsettled claims and intend to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, we believe the losses associated with all of these actions will not have a material adverse effect on our consolidated financial position or liquidity, but could possibly be material to our consolidated results of operations of any one period.

Item 4: Submission of Matters to a Vote of Security Holders

The annual meeting of the security holders of Teradyne was held on May 26, 2005. The following were elected as Class III directors, to serve for a three (3) year term and until their successors gave been duly elected and qualified:


Nominee	Total Vote For Each Nominee	Total Vote Withheld For Each Nominee
James W. Bagley	169,915,139	13,105,162
Michael A. Bradley	179,980,621	3,039,680
Vincent M. O’Reilly	181,065,077	1,955,224

In addition, the security holders also ratified the Audit Committee’s selection of the firm of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the fiscal year ending December 31, 2005, with 179,858,544 shares voting in favor, 2,151,229 shares voting against, and 1,010,528 shares abstaining.

Item 6: Exhibits


Exhibit Number		Description
31.1		Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2		Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1		Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2		Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TERADYNE, INC.

Registrant

/s/ GREGORY R. BEECHER

Gregory R. Beecher

Vice President and

Chief Financial Officer

(Duly Authorized Officer

and Principal Financial Officer)

August 12, 2005